In re Peaslee, 06-21200.

• Decision Date: 22 December 2006
• Docket Number: No. 06-21200.,06-21200.
• Citation: 358 B.R. 545
• Parties: In re Faith Ann PEASLEE, Debtor.
• Court: U.S. Bankruptcy Court — Western District of New York

358 B.R. 545

In re Faith Ann PEASLEE, Debtor.

No. 06-21200.

United States Bankruptcy Court, W.D. New York.

December 22, 2006.

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George M. Reiber, Esq., Rochester, NY, Chapter 13 Trustee.

Gabriel J. Ferber, Esq., Nesper, Ferber & DiGiacomo, LLP, Amherst, NY, for Creditor GMAC.

DECISION & ORDER

JOHN C. NINFO, II, Chief Judge.

BACKGROUND

On July 11, 2006, Faith Ann Peaslee (the "Debtor") filed a petition initiating a Chapter 13 case (the "Peaslee Case"), and George M. Reiber, Esq. (the "Trustee") was appointed as her Chapter 13 Trustee.

The Debtor filed a Chapter 13 Plan which provided, pursuant to Section 506(a)(1),¹ that the claim of General Motors Acceptance Corporation ("GMAC"), secured by a 2004 Pontiac Grand Am (the "Grand Am"), was to be treated as an allowed secured claim in the amount of $10,950.00, representing what the Debtor alleged to be the retail value of the Grand Am with the balance of the amounts due GMAC in connection with the Debtor's August 28, 2004 purchase of the Grand Am was to be allowed as an unsecured claim.² The allowed secured claim of $10,950.00 was to be paid with interest, in equal monthly installments through the Plan.

The Debtor's Chapter 13 Plan did not explain the reasons why it proposed a "cram-down" or "bifurcation" treatment of the GMAC Secured Claim, pursuant to Section 506(a)(1), rather than a treatment pursuant to that portion of Section 1325(a)(9) that has become known as the "Hanging Paragraph," since the Grand Am was purchased within 910 days of the date of the filing of the Debtor's petition. The Hanging Paragraph in Section 1325(a)(9) provides that:

For purposes of paragraph (5), section 506 shall not apply to a claim described in that paragraph if the creditor has a purchase money security interest securing the debt that is the subject of the claim, the debt was incurred with the 910-day [sic] preceding the date of the filing of the petition, and the collateral for that debt consists of a motor vehicle (as defined in section 30102 of title 49) acquired for the personal use of the debtor, or if collateral for that debt consists of any other thing of value, if the debt was incurred during the 1-year period preceding that filing.

On July 27, 2006, GMAC filed an objection to the Debtor's Chapter 13 Plan because it did not provide for GMAC' s Secured Claim to be paid in full in accordance with the Section 1325(a)(9) Hanging Paragraph.

On September 8, 2006, the Trustee filed a Motion (the "Valuation Motion") which requested that the Court, pursuant to Section 506(a)(1), determine that GMAC had an allowed secured claim for the $10,950.00 retail value of the Grand Am and an unsecured claim for the balance of the GMAC Secured Claim. The Valuation Motion asserted that: (1) the Debtor purchased the Grand Am on August 28, 2004 for her personal use from Fox Auto Group, Inc. ("Fox Auto"), which was within 910 days of the filing of her petition; (2) in connection with her purchase, the Debtor traded in a 1999 Chevrolet Blazer (the "Blazer"), which was valued at $10,923.00 in the "Retail Installment Contract"³ she entered into with Fox Auto; (3) at the time the Debtor traded in the Blazer, it was subject to a lien in favor of M & T Bank that was owed $16,905.00; (4) the August 2004 NADA Guide indicated that the Blazer had a NADA Guide trade-in value of $7,375.00; (5) the Retail Installment Contract itself indicated a negative trade-in value for the Blazer of $5,980.00, which was "rolled" into the cash price for the Grand Am and refinanced as part of the two separate transactions that were evidenced by the Retail Installment Contract; (6) the Retail Installment Contract indicated that the total amount financed for the acquisition of the Grand Am was $23,180.00, even though the July 2004 NADA Guide indicated that the manufacturer's suggested retail price for the Grand Am was $17,070.00; (7) although the Retail Installment contract granted the holder a security interest in the Grand Am for the entire amount financed, because the GMAC Secured Claim included rolled-in and refinanced debt, GMAC did not have a purchase money security interest for that portion of the debt, and, therefore, for all of the debt included in the GMAC Secured Claim, as specifically required by the Section 1325(a)(9) Hanging Paragraph; and (8) because GMAC had a purchase money security interest for only a portion and not all of the debt included in the GMAC Secured Claim, the exception set forth in the Section 1325(a)(9) Hanging Paragraph did not apply, and the GMAC Secured Claim was subject to the cram-down and bifurcation provisions of Section 506(a)(1).

On November 6, 2006, the Debtor filed a Brief in Support of the Valuation Motion, which asserted that: (1) as a general rule, if collateral secures debt for other than its own purchase price, the resulting security interest is not a purchase money security interest for that portion of the debt; (2) because the Debtor refinanced at least $5,980.00 of negative equity as part of the two transactions evidenced by the Retail Installment Contract, that portion of the debt advanced to pay off the lien on the Blazer and included in the GMAC Secured Claim, which was not for the purchase price of the Grand Am itself, was nonpurchase money and not secured by a purchase money security interest; and (3) since the GMAC Secured Claim was not all for purchase money debt, the provisions of the Section 1325(a)(9) Hanging Paragraph did not apply.

The Trustee has filed similar valuation motions in other Chapter 13 cases involving secured claims filed by American Honda Financial Corporation, American Suzuki Financial Services Company, LLC, Bank of America, ESL Federal Credit Union, HSBC Auto Finance (fka Household Automotive Finance Corporation) and Sovereign Bank (these creditors, along with GMAC, will be referred to collectively as the "Motor Vehicle Finance Group").⁴ In each individual case, counsel for the Motor Vehicle Finance Group filed opposition to the valuation motion and most of them filed briefs in opposition to the motion.

On October 31, 2006, GMAC filed a brief (the "GMAC Brief') in opposition to the Valuation Motion, and on November 9, 2006, the Trustee filed a Reply Brief (the "Trustee Brief").

In the Trustee Brief, he explained that the cases he had identified for valuation motions were those where: (1) the applicable retail installment contract clearly set forth that negative equity was being rolled-in and refinanced; or (2) although the applicable retail installment contract did not clearly set forth that negative equity was being rolled-in and refinanced, the Trustee was able to analyze the manipulation of various figures in the contract to show that significant negative equity was in fact being rolled-in and refinanced.

As to this manipulation, the Trustee Brief set forth three common categories, as follows:

1. Marking up the price of the vehicle being purchased: (a) over the dealer's sticker price; or (b) over the manufacturer's suggested retail price or average used retail price as listed in the NADA Guide;

2. Marking up the value of the trade-in over the average trade-in value listed in the NADA Guide;

3. Creating or manipulating deposits and rebates in order to hide the rolled-in and refinanced negative equity in the trade-in.

The position and principal arguments of the Trustee in his pleadings in the various valuation motions and at the consolidated oral arguments held on September 29, 2006 and November 15, 2006, each of which involved attorneys for a number of the Motor Vehicle Finance Group, can be summarized as follows:

1. In the Section 1325(a)(9) Hanging Paragraph, Congress used the term purchase money security interest, which is a security interest taken by a lender or reserved by a seller to secure its loan or financing of all or a portion of the purchase price for specific collateral acquired by a debtor;

2. In each of the cases where the Trustee filed a valuation motion, the transactions evidenced by the respective retail installment contract included the identifiable refinance of the negative equity that the debtor had in the vehicle they traded-in when they acquired a replacement vehicle;

3. There were many other Chapter 13 cases assigned to the Trustee where he believed that negative equity was refinanced in connection with the debtor's acquisition of a replacement vehicle within 910 days of the filing of their petition, but he did not bring valuation motions in those cases because the manipulations included in the respective retail installment contracts were such that he could not clearly demonstrate that negative equity had been refinanced 4. Since the Bankruptcy Code does not define the term purchase money security interest, reference must be made to applicable state law for a definition of purchase money security interest, for the cases in question, the provisions of Section 9-103 of the New York Uniform Commercial Code ("Section 9-103");⁵

5. Section 9-103(a)(2) defines "purchase money obligation" as an obligation "incurred as all or part of the price of the collateral or for value given to enable the debtor to acquire rights in or the use of the collateral if the value is in fact so used";

6. The term "price" in the Section 9-103(a)(2) definition of "purchase money obligation" means what it has always meant in the Uniform Commercial Code, the price of the specific collateral being acquired, in the cases in question, the replacement vehicle obtained by the debtor, not the "cash sale price," "total sale price" or any other similar price defined in the New York Motor Vehicle Retail Installment Sales Act ("MVRISA") or the Federal Truth-In-Lending Act ("TILA"), which define those various terms like "cash sale price" and specifically allow the inclusion of refinanced negative equity. Those statutes permit the inclusion of the refinanced item only for the...